Swiss central bank interim Chairman
Thomas Jordan’s resolve to defend its franc cap is being tested
as discussions on Greece’s debt burden persist, said analysts
from Royal Bank of Scotland Group Plc to Standard Bank Plc.

The Swiss currency, perceived as a haven in times of global
turmoil, rose as high as 1.2032 versus the euro on Feb. 1, the
strongest since Sept. 19, two weeks after policy makers imposed
a cap of 1.20 versus the euro. Jordan, who is leading the Swiss
National Bank after Philipp Hildebrand quit, has promised to
defend that level with “utmost determination,” and repeated
that pledge in a Financial Times interview published yesterday.

The franc has crept higher as discussions drag on between
Greece and its creditors over a debt-swap deal crucial for a
second bailout of the nation to avert default on a 14.5 billion-
euro ($19 billion) bond payment due March 20. European Union
leaders left a Brussels summit this week with no accord over how
to plug the country’s widening budget hole.

“We’re seeing a test of the floor,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in
Geneva. “If European policy makers make a deal, get Greece the
money, and if markets cheer on Monday, the SNB is going to wipe
the sweat off its brow. That’s the primary determinant.”

Luxembourg Prime Minister Jean-Claude Juncker, who leads
the group of euro-area finance ministers, said yesterday steps
to tackle the debt crisis adopted at the Jan. 30 summit were
“largely insufficient.” Leaders will have to take further
steps when they convene again in early March, he said.

‘Infinite Reserves’

“The franc is strengthening because of the uncertainty in
Greece,” said Ankita Dudani, a foreign-currency strategist at
Royal Bank of Scotland Group Plc in London. “The closer we get,
the more excited markets become, and if we touch 1.20, the SNB
should be ready to act. It’s obviously watching very closely.”

The Swiss currency weakened after Jordan’s comments to the
FT were released yesterday. It was 0.1 percent weaker today at
1.2052 per euro at 3:49 p.m. London time. Versus the dollar, it
weakened 0.3 percent to 91.92 centimes.

SNB policy makers imposed their ceiling on Sept. 6 after
the euro region’s worsening fiscal crisis prompted investors to
pile into the franc, pushing it to near parity and threatening
to inflict deflation onto the Swiss economy. The currency has
since weakened 8 percent against the euro after surging as much
as 37 percent in the previous 12 months.

‘Absolutely No Doubt’

“We will enforce this minimum rate with the utmost
determination and we are prepared to buy foreign currency in
unlimited quantities if necessary,” Jordan told the FT in its
interview, which was conducted last week. “There should be
absolutely no doubt whatsoever about the capability of the SNB
to maintain the minimum exchange rate.”

Steven Barrow, head of Group of 10 currency strategy at
Standard Bank in London, said that while the SNB can use
“infinite reserves” to defend the ceiling, it will still
“need to show that it’s serious.”

“The SNB would have been best served by engaging in
significant intervention well before 1.20, in order to make the
market more nervous,” he said. “If the euro-franc is sitting
just above 1.20 and there’s a shock within the euro zone such as
a Greek pullout, the euro could easily plunge through this
barrier almost before the SNB has had time to react.”

Athens Talks

EU and International Monetary Fund officials are in Athens
thrashing out budget measures that would unlock aid needed to
keep the government functioning. Bondholders last week lowered
demands for an average coupon on the new debt they would get
after European officials sought to impose steeper losses.

To Swissquote’s Rosenstreich, it’s unclear whether the SNB
will be willing to hold its ceiling given the prospects of a
“prolonged crisis” in the 17-member euro region.

“Already there’s a feeling that the longevity of the floor
is highly questionable given what we’re hearing out of Europe,”
he said. “There’s also a question about Jordan’s commitment to
the floor. Hildebrand had become a figurehead, the guy up front
and there’s a feeling of less control.”

Jordan and Jean-Pierre Danthine were left as the only board
members to steer the central bank after a probe into currency
transactions by Hildebrand’s wife prompted him to resign as
president. Swiss President Eveline Widmer-Schlumpf on Jan. 28
signaled her confidence in policy makers’ ability to act, saying
“two of three board members that have decided to impose the cap
and to defend it” are still in place.

The SNB doesn’t disclose how much money it spends on
defending the cap. The Zurich-based central bank had currency
reserves of 257.5 billion francs ($280 billion) at the end of
December, down from 261.9 billion francs at the end of the
previous month, according to a statement on its website. It will
publish its currency reserves for the end of January on Feb. 6.

Reto Huenerwadel, a senior economist at UBS AG in Zurich,
said the central bank’s balance sheet suggests that it has been
“active on markets in sizeable amounts.”

“The SNB is always being tested and challenged on
markets,” he said. “So far, it’s been very, very successful.”